Background and Purpose

On March 30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed into law. One of the provisions of this second component of the health care reform law that has received much attention is the creation of a 3.8 percent tax on investment income—defined as interest, dividends, capital gains and net rents. This tax was a last-minute addition to the Reconciliation Act of 2010.

Revenues generated by the 3.8 percent tax are statutorily allocated to the Medicare Trust Fund. This component of the health care reform law will take effect on Jan. 1, 2013. Some of the key points about this tax are:

The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI.

The new tax does NOT eliminate the benefits of the $250,000/$500,000 exclusion on the sale of a principal residence. Thus, ONLY that portion of a gain above those thresholds is included in AGI and could be subject to the tax.